Revenue Administrative Bulletin 1992-5

Approved: March 31, 1992

SEVERANCE TAX - MARKETING COSTS

(Replaces Revenue Administrative Bulletin 1989-18)

RAB-92-5. This bulletin announces an administrative change in the computation of marketing costs allowed as a deduction from the selling price in determining the tax value of gas or oil for severance tax purposes. The cap of fifty cents per thousand cubic feet (MCF) or million british thermal units (MMBTU) on payments to a fee plant owner/operator by a producer to put the producer's natural gas into marketable condition has been eliminated. Also, the computation of allowable marketing costs arising from the use of the producer's own gas conditioning equipment is no longer based upon the full capacity operation of the equipment. The actual volume of product processed through the equipment is used instead. In all other respects, this bulletin restates the discussion contained in Revenue Administrative Bulletin 1989-18.

Law

The Michigan severance tax act [MCL 205.303(l); MSA 7.353(l)] provides that the value (tax value) of all production of oil and gas shall be computed at the wellhead. If the market is away from the wellhead, there may be marketing costs allowed as deductions from the selling price determined at such time as title to the severed product transfers to the purchaser of the oil or gas. The deductions may be used to arrive at the wellhead value. The following position of the Michigan Department of Treasury is directed at gas production as the marketing costs are nil for Michigan oil and condensate.

Producer's Plant

When the gas conditioning equipment is owned and operated by the producer, the thousand cubic feet (MCF) unit marketing cost computation is to be based on the actual volume of product processed through the equipment. This includes such conditioning equipment as dehydrators, sweeteners, and compressors. Normal lease separation is not a marketing cost and the required equipment up to and through lease separation shall not be included in the marketing cost computations.

When a gas plant is owned and operated by the producer and the first sale of the gas is after the tailgate of such plant, the marketing costs per unit of product (MCF or MMBTU) are to be based on the actual throughput volume of product for that plant.

Fee Plants

When the producer is under an arm's length agreement to pay a third-party fee plant operator for gas processed prior to the first sale, the fee is a marketing cost. The allowable deduction for this marketing cost is the actual fee paid to the plant operator. Such fees are usually based on so much per MCF unit or MMBTU unit.